U.S.

Supreme Court
Helvering v. Bruun, 309 U.S. 461 (1940)

Helvering v. Bruun

No. 479

Argued February 28, 1940

Decided March 25, 1940

309 U.S. 461

Syllabus

1. Where, upon termination of a lease, the lessor repossessed the real estate and
improvements, including a new building erected by the lessee, an increase in value
attributable to the new building was taxable under the Revenue Act of 1932 as income
of the lessor in the year of repossession. P. 309 U. S. 467.

Page 309 U. S. 462

2. Hewitt Realty Co. v. Commissioner, 76 F.2d 880, and decision of this Court dealing
with the taxability vel non of stock dividends, distinguished. P. 309 U. S. 468.

3. Even though the gain in question be regarded as inseparable from the capital, it is
within the definition of gross income in 22(a) of the Revenue Act of 1932, and, under
the Sixteenth Amendment, may be taxed without apportionment amongst the States.
P. 309 U. S. 468.

105 F.2d 442 reversed.

Certiorari, 308 U.S. 544, to review the affirmance of a decision of the Board of Tax
Appeals overruling the Commissioner's determination of a deficiency in income tax.

Page 309 U. S. 464

U.S. Supreme Court

Helvering v. Bruun, 309 U.S. 461 (1940)

Helvering v. Bruun

No. 479
Argued February 28, 1940

Decided March 25, 1940

309 U.S. 461

CERTIORARI TO THE CIRCUIT COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Syllabus

1. Where, upon termination of a lease, the lessor repossessed the real estate and
improvements, including a new building erected by the lessee, an increase in value
attributable to the new building was taxable under the Revenue Act of 1932 as income
of the lessor in the year of repossession. P. 309 U. S. 467.

Page 309 U. S. 462

2. Hewitt Realty Co. v. Commissioner, 76 F.2d 880, and decision of this Court dealing
with the taxability vel non of stock dividends, distinguished. P. 309 U. S. 468.

3. Even though the gain in question be regarded as inseparable from the capital, it is
within the definition of gross income in 22(a) of the Revenue Act of 1932, and, under
the Sixteenth Amendment, may be taxed without apportionment amongst the States.
P. 309 U. S. 468.

105 F.2d 442 reversed.

Certiorari, 308 U.S. 544, to review the affirmance of a decision of the Board of Tax
Appeals overruling the Commissioner's determination of a deficiency in income tax.

Page 309 U. S. 464

MR. JUSTICE ROBERTS delivered the opinion of the Court.

The controversy had its origin in the petitioner's assertion that the respondent realized
taxable gain from the forfeiture of a leasehold, the tenant having erected a new
building upon the premises. The court below held that no income had been realized.
[Footnote 1] Inconsistency of the decisions on the subject led us to grant certiorari. 308
U.S. 544.

The Board of Tax Appeals made no independent findings. The cause was submitted
upon a stipulation of facts. From this it appears that, on July 1, 1915, the respondent, as
owner, leased a lot of land and the building thereon for a term of ninety-nine years.
The lease provided that the lessee might at any time, upon giving bond to secure
rentals accruing in the two ensuing years, remove or tear down any building on the
land, provided that no building should be removed or torn down after the lease
became forfeited, or during the last three and one-half years of the term. The lessee
was to surrender the land, upon termination of the lease, with all buildings and
improvements thereon.

In 1929, the tenant demolished and removed the existing building and constructed a
new one which had a useful life of not more than fifty years. July 1, 1933, the lease was
cancelled for default in payment of rent and taxes, and the respondent regained
possession of the land and building.

The parties stipulated

"that as at said date, July 1, 1933, the building which had been erected upon said
premises by the lessee had a fair market value of $64,245.68, and that the unamortized
cost of the old building, which was removed from the premises in 1929 to make way for
the new building, was $12,811.43, thus leaving a net fair market value as at July 1, 1933,
of $51,434.25, for

Page 309 U. S. 465

the aforesaid new building erected upon the premises by the lessee."

On the basis of these facts, the petitioner determined that, in 1933, the respondent
realized a net gain of $51,434.25. The Board overruled his determination, and the Circuit
Court of Appeals affirmed the Board's decision.

The course of administrative practice and judicial decision in respect of the question
presented has not been uniform. In 1917, the Treasury ruled that the adjusted value of
improvements installed upon leased premises is income to the lessor upon the
termination of the lease. [Footnote 2] The ruling was incorporated in two succeeding
editions of the Treasury Regulations. [Footnote 3] In 1919, the Circuit Court of Appeals
for the Ninth Circuit held, in Miller v. Gearin, 258 F. 225, that the regulation was invalid,
as the gain, if taxable at all, must be taxed as of the year when the improvements were
completed. [Footnote 4]

The regulations were accordingly amended to impose a tax upon the gain in the year
of completion of the improvements, measured by their anticipated value at the
termination of the lease and discounted for the duration of the lease. Subsequently, the
regulations permitted the lessor to spread the depreciated value of the improvements
over the remaining life of the lease, reporting an aliquot part each year, with provision
that, upon premature termination, a tax should be imposed upon the excess of the
then value of the improvements over the amount theretofore returned. [Footnote 5]

In 1935, the Circuit Court of Appeals for the Second Circuit decided, in Hewitt Realty
Co. v. Commissioner,
Page 309 U. S. 466

76 F.2d 880, that a landlord received no taxable income in a year, during the term of
the lease, in which his tenant erected a building on the leased land. The court, while
recognizing that the lessor need not receive money to be taxable, based its decision
that no taxable gain was realized in that case on the fact that the improvement was
not portable or detachable from the land, and, if removed, would be worthless except
as bricks, iron, and mortar. It said, 76 F.2d at 884:

"The question, as we view it, is whether the value received is embodied in something
separately disposable, or whether it is so merged in the land as to become financially a
part of it, something which, though it increases its value, has no value of its own when
torn away."

This decision invalidated the regulations then in force. [Footnote 6]

In 1938, this court decided M.E. Blatt Co. v. United States, 305 U. S. 267. There, in
connection with the execution of a lease, landlord and tenant mutually agreed that
each should make certain improvements to the demised premises and that those
made by the tenant should become and remain the property of the landlord. The
Commissioner valued the improvements as of the date they were made, allowed
depreciation thereon to the termination of the leasehold, divided the depreciated
value by the number of years the lease had to run, and found the landlord taxable for
each year's aliquot portion thereof. His action was sustained by the Court of Claims. The
judgment was reversed on the ground that the added value could not be considered
rental accruing over the period of the lease; that the facts found by the Court of Claims
did not support the conclusion of the Commissioner as to the value to be attributed to
the improvements

Page 309 U. S. 467

after a use throughout the term of the lease, and that, in the circumstances disclosed,
any enhancement in the value of the realty in the tax year was not income realized by
the lessor within the Revenue Act.

The circumstances of the instant case differentiate it from the Blatt and Hewitt cases,
but the petitioner's contention that gain was realized when the respondent, through
forfeiture of the lease, obtained untrammeled title, possession, and control of the
premises, with the added increment of value added by the new building, runs counter
to the decision in the Miller case and to the reasoning in the Hewitt case.

The respondent insists that the realty -- a capital asset at the date of the execution of
the lease -- remained such throughout the term and after its expiration; that
improvements affixed to the soil became part of the realty indistinguishably blended in
the capital asset; that such improvements cannot be separately valued or treated as
received in exchange for the improvements which were on the land at the date of the
execution of the lease; that they are therefore in the same category as improvements
added by the respondent to his land, or accruals of value due to extraneous and
adventitious circumstances. Such added value, it is argued, can be considered capital
gain only upon the owner's disposition of the asset. The position is that the economic
gain consequent upon the enhanced value of the recaptured asset is not gain derived
from capital or realized within the meaning of the Sixteenth Amendment, and may not
therefore be taxed without apportionment.

We hold that the petitioner was right in assessing the gain as realized in 1933.

We might rest our decision upon the narrow issue presented by the terms of the
stipulation. It does not appear what kind of a building was erected by the tenant, or
whether the building was readily removable from the

Page 309 U. S. 468

land. It is not stated whether the difference in the value between the building removed
and that erected in its place accurately reflects an increase in the value of land and
building considered as a single estate in land. On the facts stipulated, without more, we
should not be warranted in holding that the presumption of the correctness of the
Commissioner's determination has been overborne.

The respondent insists, however, that the stipulation was intended to assert that the sum
of $51,434.25 was the measure of the resulting enhancement in value of the real estate
at the date of the cancellation of the lease. The petitioner seems not to contest this
view. Even upon this assumption, we think that gain in the amount named was realized
by the respondent in the year of repossession.

The respondent cannot successfully contend that the definition of gross income in Sec.
22(a) of the Revenue Act of 1932 [Footnote 7] is not broad enough to embrace the
gain in question. That definition follows closely the Sixteenth Amendment. Essentially the
respondent's position is that the Amendment does not permit the taxation of such gain
without apportionment amongst the states. He relies upon what was said in Hewitt
Realty Co. v. Commissioner, supra, and upon expressions found in the decisions of this
court dealing with the taxability of stock dividends to the effect that gain derived from
capital must be something of exchangeable value proceeding from property, severed
from the capital, however invested or employed, and received by the recipient for his
separate use, benefit, and disposal. [Footnote 8] He emphasizes the necessity that the
gain be separate from the capital and separately disposable. These expressions,
however,

Page 309 U. S. 469

were used to clarify the distinction between an ordinary dividend and a stock dividend.
They were meant to show that, in the case of a stock dividend, the stockholder's
interest in the corporate assets after receipt of the dividend was the same as and
inseverable from that which he owned before the dividend was declared. We think
they are not controlling here.
While it is true that economic gain is not always taxable as income, it is settled that the
realization of gain need not be in cash derived from the sale of an asset. Gain may
occur as a result of exchange of property, payment of the taxpayer's indebtedness,
relief from a liability, or other profit realized from the completion of a transaction.
[Footnote 9] The fact that the gain is a portion of the value of property received by the
taxpayer in the transaction does not negative its realization.

Here, as a result of a business transaction, the respondent received back his land with a
new building on it, which added an ascertainable amount to its value. It is not
necessary to recognition of taxable gain that he should be able to sever the
improvement begetting the gain from his original capital. If that were necessary, no
income could arise from the exchange of property, whereas such gain has always
been recognized as realized taxable gain.

Judgment reversed.

THE CHIEF JUSTICE concurs in the result in view of the terms of the stipulation of facts.

MR. JUSTICE McREYNOLDS took no part in the decision of this case.

[Footnote 1]

Helvering v. Bruun, 105 F.2d 442.

[Footnote 2]

T.D. 2442, 19 Treas.Dec.Int.Rev. 25.

[Footnote 3]

Regulations 33 (1918 Ed.) Art. 4, 50; Regulations 45 (2d 1919 Ed.) Art. 48.

[Footnote 4]

This court denied certiorari, 250 U.S. 667.

[Footnote 5]

T.D. 3062, 3 Cum.Bull. 109; Regulations 45 (1920 Ed.), Art. 48; Regulations 62, 65, and 69,
Art. 48; Regulations 86, 94, and 101, Art. 22(a)-13.

[Footnote 6]

The Hewitt case was followed in Hilgenberg v. United States, 21 F.Supp. 453, Staples v.
United States, 21 F.Supp. 737, and English v. Bitgood, 21 F.Supp. 641.

[Footnote 7]
C. 209, 47 Stat. 169, 178.

[Footnote 8]

See Eisner v. Macomber, 252 U. S. 189, 252 U. S. 207; United States v. Phellis, 257 U. S.
156, 257 U. S. 169.

[Footnote 9]

Cullinan v. Walker, 262 U. S. 134; Marr v. United States, 268 U. S. 536; Old Colony Trust Co.
v. Commissioner, 279 U. S. 716; United States v. Kirby Lumber Co., 284 U. S. 1; Helvering v.
American Chicle Co., 291 U. S. 426; United States v. Hendler, 303 U. S. 564.